Good Evening, folks!

The strange, but pleasantly-cool weather continues here in Chicago.  More like early May, rather than mid-July, around here!

As the economy continues weak in many parts of the U.S., and retail sales continue to slide downward, many of the largest retailers are using favorable language in their mall and shopping center leases to renegotiate their store rents.  Savings to these big chains could be substantial!

Reported in today's Wall Street Journal by Elizabeth Holmes, Vanessa O'Connell, and Kris Hudson, Many retailers are exercising benefits provided by "contenancy clauses," common in many retail store leases.  This language lets tenants receive considerable rent reductions, or even terminate their leases, if important tenants in a shopping center close down and leave.

The Chico's Apparel Store chain says it has saved over $8 Million by employing contenancy clauses in its store leases.  Charming Shoppes, Inc, which operates Ladies Apparel Stores Lane Bryant and Fashion Bug, figures to save about $10 Million in 2009 in negotiated rent relief using the same provisions. 

Often, a mall operator in breach of it's contenancy promise allows the retailer to cut its rent, in some cases, by 50% or more until the departing major tenant is replaced.  Many leases allow other tenants to terminate their leases and leave themselves if no acceptable new store tenants are found in a typical one-year grace period.

At a time when many mall and shopping center operators are struggling to stay afloat among record vacancies, clever retailers are using their contenancy clauses to negotiate multi-year reductions in rent, sometimes in exchange for agreeing to extend their lease terms. 

For retail stores, rent is among its biggest expenses, often accounting for up to 12% of the store's gross annual revenue.  Rents are typically a fixed cost - they don't usually go down as sales do.  Declining sales this year may push the rent/gross sales percentage to upwards of 13% this year, according to estimates by Citigroup.

For Chino's, rent as a percentage of sales revenue increased to 10% in 2008, versus 7% in 2006.

Mall and shopping center operators today are suffering through prolonged revenue drops themselves during the current U.S. Recession.  According to Reis, Inc., a research company specializing in commercial real estate trends, the average lease rate at non-enclosed shopping centers and strip centers (excluding enclosed malls) in the top 77 U.S. Metro Markets declined for the fifth consecutive quarter during the Second Quarter, 2009.  That is the longest string of quarterly declines since Reis began its research in 1980.

In enclosed shopping malls, average store rents fell for the third consecutive quarter during the Second Quarter of this year.  Store vacancies have also reached near-historic high levels, as 27 major retail chains, including Linens 'n Things, Circuit City, and The Sharper Image, have filled for bankruptcy within the last year, then liquidated their assets and fled their retail stores.

Even long-time retail fixtures Blockbuster and Starbucks have been aggressively pursuing contenancy clauses and other lease concession provisions in search of monthly rental savings.

Store failures trigger reduced rents across the center, or canceled leases, greater vacancies, and, at the extreme, virtual retail ghost towns in some malls and strip centers.

See our post today, please, via BlogChicagoHomes.com.

DEAN & DEAN'S TEAM CHICAGO